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Fred's undefined may finally be a willing seller after takeout offers for the pharmacy operator and discount retailer fell short of expectations a couple years back.
The Memphis, Tenn.-based company's management team opt out of a Q&A session on its Thursday, Dec. 8, third quarter earnings call with investors due to a "pending transaction." The company didn't elaborate and Fred's CFO Rick Hans didn't immediately return a call on Friday seeking further clarity, but there are two logical possibilities to explain the comments.
One scenario, as TheStreet's sister publication The Deal reported in July, would be that Fred's is close to an agreement to purchase a handful of stores being sold by antitrust divestitures expected to result from Walgreens Boots Alliance's (WBA) pending acquisition of Rite Aid (RAD) . While Fred's purchase of stores sold under Federal Trade Commission order is possible, it seems more likely Fred's is referring to an approach from a private equity sponsor to outright buy the company, Nick Mitchell of Northcoast Research told The Deal on Friday.
Fred's shares have lost roughly 36% of their value year-to-date. Fred's closed Friday at $10.85 per share and ticked up 36 cents, or 3.3%, Monday morning to $11.21. The company has a market cap of $419 million.
"If they were buying store from Walgreens, I just don't think they would be that adverse to taking questions," Mitchell said.
He also noted that the Walgreens-Rite Aid assets on the block don't necessarily fit the bill for Fred's, whose strategy is focused on growth in rural markets where it can be the sole provider.
Fred's last strategic review process stalled in November 2014, when CEO Jerry Shore told The Deal that indications of interest from financial parties came in below the company's desired level. The chief executive at the time cited volatility in its financial performance as impacting the process, and Fred's subsequently shifted its attention to building out its pharmacy and specialty pharmacy business.
While a sale was put on the back burner a couple years back, the company's recent performance on the public markets would likely change the dynamics in terms of price this time around, suggesting Fred's board may be more willing to negotiate a deal, Mitchell said.
Assigning Fred's a takeout valuation is challenging given the volatility of its cash flow and earnings in recent years, but Mitchell's calculations pan out to a price tag within the range of $13 and $20 a share, or more likely, between $13 to $16 per share. The latter range suggests the company ought to fetch between roughly $485 million and $600 million based upon its approximately 37.35 million outstanding shares.
While CVS Health (CVS) and Walgreens had been also rumored buyers in the past, Mitchell suspects a sale to a sponsor is more likely as opposed to a strategic.
"I don't think anyone would want to tackle the immense turnaround at Fred's," he said, referring to the strategics. "Both sides of the house have to be improved", he added, referring to the front-end of Fred's stores and its pharmacy operations.